Support

A cookie is a piece of data stored by your browser or device that helps websites like this one recognize return visitors. We use cookies to give you the best experience on BNA.com. Some cookies are also necessary for the technical operation of our website. If you continue browsing, you agree to this site’s use of cookies.

Events

Bloomberg Next marketing services allow clients to elevate their brands and extend their reach through our established and trusted expertise, enhanced with engaging event production, appealing design, and compelling messaging.

The European Commission’s decision telling Ireland to retroactively recoup $14.5 billion
in unpaid taxes from Apple Inc. sets the stage for a game of tax chess in the European
courts that could go on for years.

Public statements from the central protagonists—the commission, Apple and Ireland—show
the parties wedded to their legal positions with virtually no chance of settlement.
The losing party before the EU General Court will almost certainly appeal the decision
to the European Court of Justice.

In its
decision released Dec. 19, the commission said tax rulings issued by the Irish Revenue to two Apple subsidiaries
“confer a selective advantage on those companies that is imputable to Ireland and
financed through State resources, which distorts or threatens to distort competition
and which is liable to affect trade between Member States.”

Ireland’s Department of Finance immediately reacted with a
three-page document arguing the commission misapplied the EU law prohibiting the granting of favorable
tax treatment to specific corporations, including the concept of “selective advantage.”

Bold Decision

“It is a bold decision,”
Heather Self, a London-based tax partner with global law firm Pinsent Masons, told
Bloomberg BNA. “It reaches beyond what is happening in Ireland and questions whether
the U.S. head office has any substance.”

“Apple was very aggressive in allocating entrepreneurial profit to stateless entities,
so the profits were apparently not taxed anywhere,” Self said.

The evidence from Apple and Ireland “is weaker than I would have expected, particularly
the lack of a transfer pricing study, and the apparently inconsistent ruling practice,”
the London practitioner said. “This will run for years, and at this stage I would
not like to predict the outcome. It is far from a slam dunk for either side.”

Self said the decision “does not discuss the key selective advantage point in much
detail.”

U.S. Reaction

Apple Inc. responded to the decision by charging that the company had been singled
out by the commission as a “convenient target.”

“Because our products and services are created, designed and engineered in the U.S.,
that’s where we pay most of our tax,” Apple said in a Dec. 19 statement. “This case
has never been about how much tax Apple pays, it’s about where that tax is paid.”

A U.S. Treasury spokesperson, in a statement, said “We continue to believe the Commission
is retroactively applying a sweeping new State aid theory that is contrary to well-established
legal principles, calls into question the tax rules of individual countries, and threatens
to undermine the overall business climate in Europe.”

Three-Year Investigation

The commission’s decision followed a three- year investigation into two tax rulings
issued by Ireland in favor of two Apple group companies: Apple Sales International
(ASI) and Apple Operations Europe (AOE). Both companies were carrying on a trade in
Ireland through a branch.

Self said these companies were both incorporated in Ireland and, although they didn’t
have any taxable presence in the U.S. or any other tax jurisdiction, they weren’t
treated as Irish tax resident because Irish law at the time regarded them as U.S.
tax resident.

Irish law has since been amended and Apple has now changed its operating structure.

Self said the tax rulings concerned the method of allocation of profit to the Irish
branches of ASI and AOE. The rulings meant that almost all of the sales profits recorded
by the two companies were internally attributed to a head office of ASI that the commission
said, in a statement issued in August, “existed only on paper and could not have generated
such profits.”

Self pointed out the profits allocated to the head office weren’t subject to tax in
any country and as a result, the commission said Apple only paid an effective tax
rate of between 0.005 percent and 1 percent.

Selective Advantage

The key issue the EU General Court will have to rule on is the EU law concept of “selective
advantage.”

“The Commission has no competence, under state aid rules, unilaterally to substitute
its own view of the geographic scope and extent of the member state’s tax jurisdiction
for those of the member state itself,” the Irish government said in a Dec. 19 statement.

The government said the purpose of the EU state aid rules is to tackle state interventions
that confer a selective advantage. “The state aid rules by their nature cannot remedy
mismatches between tax systems on a global level.”

Self said under EU rules it is unlawful for any EU country to give financial help
to selected companies in a way which would distort fair competition. If a tax ruling
contravenes market principles so as to confer a selective advantage, it could be considered
to be state aid.

“Selective advantage issue is at the heart of the decision,” Steve Towers of Deloitte
LLP’s Singapore office said in an e-mail. Kai Struckmann, a Brussels-based competition
lawyer with White & Case LLP who previously worked as an antitrust lawyer with the
European Commission, agreed. “The question of selectivity will be at the heart of
the case,” he told Bloomberg BNA in an e-mail Dec. 20.

Struckmann questioned “whether the appropriate reference framework indeed is the general
tax system, as the EC claims can be deduced from the Belgian Coordination Centres
Forum 187 case.” The Apple case is “certainly not in line with other case law of the
Court.”

Three-Step Analysis

The commission, in its decision, identified a complicated, lengthy three-step analysis
to determine whether a tax measure is selective.

Apple and Ireland are likely to attack each and every conclusion set forth in the
commission’s analysis.

The first step is to identify the common or normal tax regime in a member state. Towers
said the commission calls this the “reference system,”
but perhaps “benchmark” would have been a better term.

In its opinion, the commission said the “reference system” to be used in the case
is the “ordinary rules of taxation of corporate profit in Ireland.”

The second step is to determine whether the relevant tax measure is a “derogation”
from that reference system, on the basis that it differentiates—that is gives a different
tax treatment—between businesses that are in a comparable factual and legal situation.

If there is a derogation, the third step is to determine whether the measure is justified
by the nature or general scheme of the reference system.

Arm's-Length Principle

The commission said the second analytical step involves identifying a derogation from
the reference system by virtue of the incorrect application of the arm’s-length principle.

Under the relevant Irish tax legislation, the two companies were therefore taxable
in Ireland on any trading income arising directly or indirectly through or from the
branch, and any income from property or rights used by, or held by or for, the branch.

Towers said the Commission decided that this provision requires the use of a profit
allocation method based on the arm’s-length principle. “This is very important, because
Ireland argued that its tax law, prior to 2011, did not include the arm’s-length principle.”

According to the commission, the European Court of Justice has held that a reduction
in the taxable base resulting from a tax measure that enables a taxpayer to employ
transfer prices in intra-group transactions that don’t resemble prices “which would
be charged in conditions of free competition between independent undertakings negotiating
under comparable circumstances at arm’s length” confers a selective advantage on the
taxpayer. Towers pointed out that the commission referred to the 2006 Belgian coordination
center cases as its authority.

The commission said the same principle should apply to intra-entity transactions:
“The same principle applies to the internal dealings of different parts of the same
integrated company, such as a branch that transacts with other parts of the company
to which it belongs.” Towers said the commission doesn’t cite any authority for this
statement.

Towers said the commission emphasized that the source of the arm’s-length principle,
in this case, is Article 107 of the Treaty on the Functioning of the European Union,
not the OECD transfer pricing guidelines or the OECD Article 7 report.

Identification of Derogation

The commission said the Irish Revenue incorrectly applied the arm’s-length principle
by accepting the unsubstantiated assumption that the Apple IP licenses held by ASI
and AOE should be allocated outside Ireland. “Given the lack of functions performed
by the head offices and/or the functions performed by the Irish branches, the Apple
IP licenses for the procurement, manufacturing, sales and distribution of Apple products
outside of the Americas should have been allocated to the Irish branches for tax purposes,”
the decision said.

The incorrect application of the arm’s-length principle led to a selective advantage
to ASI and AOE because it resulted in a lowering of their corporation tax liability
under the ordinary rules of taxation of corporate profit in Ireland, the commission
found.

Towers said the commission concluded that the derogation—that is, the selective advantage—wasn’t
justified by the nature or general scheme of the Irish tax system.

To contact the reporter on this story: Kevin A. Bell in Washington at
kbell@bna.com

To contact the editor responsible for this story: Molly Moses at
mmoses@bna.com

All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to books@bna.com.

Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)

Notify me when updates are available (No standing order will be created).

This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to research@bna.com.

Put me on standing order

Notify me when new releases are available (no standing order will be created)